Improving Production Costs of Shampoo In Unilever Vietnam

  TR   HO CHI MINH CITY OPEN UNIVERSITY  NG IH CM UNIVERSITÉ LIBRE DE BRUXELLES  TP.HCM  SOLVAY BUSINESS SCHOOL  MBAVB2    HUYNH QUOC DAN  I m proving Product ion Cost s of Sham poo I n Unilever Viet nam   MASTER PROJECT  MASTER IN BUSINESS ADMINISTRATION  (PART TIME)    Hochiminh city (2012) i   DECLARATION I, Huynh Quoc Dan, declare that the work presented in this final project is, to the best of my knowledge and belief, original, except as acknowledged in the text, and that I has not submitted the material, either in whole or in part, for the award of any other academic degree or diploma Except where otherwise I indicate, this report is my own work I certify that I have complied with the rules, requirements, procedures and policy of the Ho Chi Minh City Open University and the Solvay Business School, Université Libre De Bruxelles I also certify that I have complied with the Unilever CoB – Codes of Business What I have mentioned in the report not make harmful for the business, people as well as the company’s reputation Print Name: HUYNH QUOC DAN Signature: Date: March 2012 Final project MBAVB   ii   ACKNOWLEDGEMENTS Developing a project involves the considerable support and encouragement from a very wide range of people It is both a journey of self-discovery and a demand on those people closest to me First of all, I would like to express my deep gratitude to Nguyen Manh Ha, Ph.D who enthusiastically support and avise me to complete this project He has taught me, both consciously and unconsciously, how good report is done I apprecate highly all his contributions of time, ideas to instruct and correct my report meticulously before and during Tet holiday It is not only his physical supports, but it is also his working attitude – how serious he is! Finally, I would send to him a special thank for accepting me to present this time I am also thankful Ms Le Thi Thu Ha who assists me in administration Thank you to my line manager in Unilever Vietnam – Mr Nguyen Vinh Long, Rudy.Brigianto and Mr Pham Manh Tri who so willingly gave their time to share me the issue on the current process as well as their expectation to this research By their agreement, I can able to access to the UVN profile as well as pick up some data Finally, I would like to send my acknowledgement to my friends and other people whom I not mention above Their contribution is highly appreciated Final project MBAVB   iv   EXECUTIVE SUMMARY All businesses should try to operate efficiently This is particularly important for a growing business In many markets, a business needs to be at least as efficient as the main competitors are in order to be able to compete and survive in the long-term A more efficient business will produce lower cost goods than competitors and may generate more profit possibly at lower prices One of the approaches is to reduce the manufacturing (production) costs Reducing manufacturing costs increases profitability by making more with what you have or the same with less Production cost reduction - There can be a lot of discussion within a company about what they should to implement a cost reduction program, yet what they should discuss is what they should not In other words, the company management expect a cost reduction program to achieve results that flow to the bottom line of the financial statement without causing damage to the organization itself A good cost reduction program is as much about damage control as it is about cutting costs, including cutting non-benefit items, cutting wastes, cutting high costly but less benefit activities, etc Finding the alternative ways instead of the traditional ways will also help to improve the costs in production This report is a result case study, and it covers the main parts below:  Study the current production cost elements and costs reduction practices in Unilever Vietnam where manufacturing is one of the key activities production cost reduction is also their top priority schedule  Recommend to the company the ideas for cost reduction This study does not completely drive to reduce the production costs However, it is an approach to the production costs deeply to show people how to improve it Final project MBAVB   v   TABLE OF CONTENTS Declaration i Acknowledgements ii Tutor’s certification iii Executive summary iv Table of contents v List of figures viii List of table ix Glossary and definition x Chapter I: INTRODUCTION 1.1 Problem statement 1.2 Objectives of the study 1.3 Research methodology 1.3.1 Secondary data 1.3.2 Case study 1.4 1.4.1 Significance 1.4.2 Limitation 1.5 Significance and limitation of the study Organization of the research study 2.1.1 Definitions 2.1.2 Cost in the short run 15 2.1.3 Cost in the long run 16 Chapter II: LITERATURE REVIEW 2.1 Theory of production and costs 2.1.4 Relationship between long run and short run costs 17 2.1.5 Cost minimization and profit maximization 18 2.2 Production management theory Final project MBAVB   20 vi 2.2.1 Supply chain   20 2.2.2 Supply chain management 21 2.2.3 Supply chain stages 22 Summary 23 2.3 Chapter III: UNILEVER VIETNAM’S INTRODUCTION 3.1 Unilever group worldwide 24 3.1.1 Vision 24 3.1.2 Mission 25 3.1.3 Values 25 3.2 Company history 26 3.3 Unilever Vietnam 27 3.3.1 Legal, vision, and mission 27 3.3.2 Overview of manufacturing Unilever Vietnam 28 3.3.3 Manufacturing targets 29 3.3.4 Summary 30 Chapter IV: PRODUCTION COST ANALYSIS 4.1 Introduction 4.1.1 Supply chain model in Unilever 4.2 31 31 4.1.2 Cost structure in Unilever Vietnam 33 33 4.2.1 Cost structure 33 4.2.2 Concepts of the cost in UVN 34 4.2.3 Production cost structure in Unilever Vietnam 4.2.4 Shampoo cost figure in Unilever Vietnam 4.2.5 Benchmarking 4.3 Cost structure in Unilever 37 40 41 Comparison the production costs among companies in other countries 4.3.1 43 Direct labour 43 Final project MBAVB   vii   4.3.2 Indirect labour 45 4.3.3 Depreciation 45 4.3.4 Repair and maintenance 47 4.3.5 Utility consumption 48 4.3.6 Indirect consumables 49 4.3.7 Summary 50 4.4 Production cost elements 50 4.5 Cost simulation 51 4.5.1 Volume increased 10% 52 4.5.2 Electricity consumption reduction by 10% 53 Findings from the case study 54 4.6 4.6.1 Production cost reduction practices 4.6.2 Summary 54 56 Chapter V: CONCLUSION AND RECOMMENDATION 5.1 Conclusion 58 5.2 Recommendation 58 5.2.1 Improvement area 58 5.2.2 Recommendation for implementation 59 5.2.3 Production cost reduction opportunities 59 REFERENCES 61 APPENDIXES Appendix 1: Benchmark of production costs Unilever Asia 63 Appendix 2: OEE chart 64 Appendix 3: Shampoo making process diagram – Unilever Appendix 4: Energy saving application photos Final project MBAVB   65 66 viii   LIST OF FIGURES Figure 2.1 Schematic production system Figure 2.2 The production function Figure 2.3 Technical efficiency and inefficiency – labor 10 Figure 2.4 A specific short-run production function 11 Figure 2.5 Relationship between inputs, outputs and costs 12 Figure 2.6 Production function and total cost curve 13 Figure 2.7 Short run cost curve 15 Figure 2.8 The family of cost curves associated with a U-shaped LAC 17 Figure 2.9 Short run profit maximization 19 Figure 2.10 Supply, production and distribution system 22 Figure 3.1 Unilever global structure Figure 3.2 Mission and vision – Unilever Vietnam 28 Figure 3.3 Unilever Vietnam manufacturing 29 Figure 4.1 Three physical phases of the supply chain 32 Figure 4.2 Supply chain circulation 36 Figure 4.3 Chart of typical production cost structure 38 Figure 4.4 Detail production cost chart 39 Figure 4.5 Shampoo production cost chart 41 Figure 4.6 Chart of the production cost in the cluster 43 Figure 4.7 Direct labor comparison 44 Figure 4.8 Indirect labor chart 45 Figure 4.9 Depreciation chart 46 Figure 4.10 Repair and maintenance (R&M) chart 24 47 Figure 4.11 Utility consumption chart 48 Figure 4.12 Indirect consumable chart 49 Final project MBAVB   ix   LIST OF TABLES 4.1 Table 4.1 Typical production cost structure 37 4.2 Table 4.2 Hair (shampoo) production cost figure 40 4.3 Table 4.3 Production cost benchmark in the cluster 42 4.4 Table 4.4 Production cost elements in haircare 51 4.5 Table 4.5 Detail production costs in haircare liquid 52 4.6 Table 4.6 Production costs reduced when volume increased by 10% 54 4.7 Table 4.7 Extraction of the saving project list 55 Final project MBAVB   x   GLOSSARY AND DEFINITION UVN Unilever Vietnam JV joint venture FDI foreign direct investment SCOR supply chain operations ref- CoB codes of business FMCG fast moving erence consumer goods GSV gross sales value TTS trade terms structure CPG consumer packaged goods TO turn over COGS cost of goods sold SCC supply chain cost EBIT earning before income tax GP gross profit TC total cost A&P advertising and promotions TFC total fixed cost PBI profit before indirect TVC total variable cost Ind Indirect AFC average fixed cost TR trading results ATC average total cost FiC financing charge MC marginal cost TrC trading contribution VC variable cost P&L profit and loss FC fixed cost R&M repair and maintenance STC short run total cost DO diesel oil LAC long run average cost FO fuel oil LMC long run marginal cost OEE overall equipment efficien- SMC short run marginal cost SC supply chain SCM supply chain management APICS American Production and Inventory Control Society VSM viable system mode ERP enterprise resource planning CEO chief executive officer Final project MBAVB   cy 52    Recall from previous chapter, Unilever Vietnam is struggling with the Euro by Euro of the shampoo product in the same region illustrated in the benchmarking chart The following simulations base on the production function and the Unilever orientation above Table 4.4 – Detail production costs of Haircare liquid, 2011 Q1'11 Q2'11 Q3'11 Q4'11 1,961.4 2,731.9 3,335.3 2,452.2 1,513.9 984.7 2,088.3 1,532.2 3,000.7 3,143.9 2,471.8 2,570.7 2,474.1 2,930.6 1,948.6 2,712.6 3,550.8 2,293.4 2,797.3 1,283.9 4,124.8 2,168.7 2,615.2 3,404.7 2,391.6 2,973.7 1,423.9 1,860.3 Sum (mio VND) 7,610.9 11,060.3 13,434.6 9,609.0 9,855.5 6,166.7 11,004.0 15,067.6 18,124.0 18,711.4 16,838.0 68,741.0 6,540.9 8,542.3 7,483.4 6,847.6 29,414.1 90.9 83.7 98.6 97.0 92.2 Hair care liquid products 01.Permanent Labor 02.Casual Labor 03 Depreciation 04 Indirect - Labor 05 Indirect - Others 06 RandM 07 Utility Total expenses Volume (ton) Eur/ton Sum (EUR) 300,231 436,303 529,965 379,052 388,777 243,264 434,084 2,711,676 Source: UVN Ninety two (92) Euro for each ton of the hair care product is its average production cost It is one of the key factors to evaluate manufacturing performance in Unilever The following simulations are to make change some factors and keep the rest unchanged Then, it will compare results of the change and actual production costs in 2011 4.5.1 Volume increased by 10% What will happen if the volume increases by 10%? In the short term, they will keep unchanged all fixed items mentioned above, and little bit increase the others With this scenario, it will adjust the following factors: Final project MBAVB   53     Fixed items: Indirect labour, Depreciation and a part of Utility (70%), 30% of the Indirect other and 30% of the Repair and maintenance (R&M) Table 4.5 – production costs reduced when volume increased by 10% Volume growth (10%) Variable costs increased by 5% Fixed costs Total expenses (in mio VND) Production cost (EUR/ton) Q1 7,195 Q2 9,397 Q3 8,232 Q4 7,532 Ave 32,356 7,422.2 9,390.6 9,193.3 8,841.3 34,847 7,998.8 9,180.6 9,955.9 8,417.8 35,553 15,421.0 84.5 18,571.1 78.0 19,149.2 91.8 17,259.0 90.4 70,400 85.8 Source: developed for this study For the repair and maintenance costs, it should have 30% for the long-term service contract outsourced, so even the company does not have any output; they have to pay for these services The same as Utility mentioned about 70% consumption of the electricity to run ventilation system included fans and air conditioners, and lighting system, they have to keep all of those facility ON even run less or more  Variable items are including direct labor, and 30% Utility consumption (water and electricity for process equipment) In the chart, it increases 5% However, it should be less than 5% even though no cost up-charged In many cases, the factory will utilise all existing resources to get more outputs Resulting of the volume increased by 10%, total expenses in the production is about VND 70.4 billions versus VND 68.7billions In EUR unit, it is 85.8 per ton versus 92.2 It means that the expenses increase 6.9% even 10% volume increased; and the company will gain at least EUR 6.4 per ton if it can increase by 10% volume In this case, the more volume increased, the more company gained Final project MBAVB   54    In general, the same fixed costs, if we increase volume, total expenses may increase However, the production counted per unit is reducing It is not only Unilever, but it is also applying this practice in the other companies They always want to utilise the fixed assets to maximise the profits 4.5.2 Electricity consumption reduction by 10% Studying the electricity consumption of the factory in 2011, it contributes EUR 4.1 per ton of product If they can reduce 10% of this number, they not improve much (only Eur 0.41 per ton) However, they can gain around VND 300millions They can use this amount to improve working condition by investing more facilities or better facilities On the other hand, they can use this money to support Marketing and Sale activities Table 4.6 – production costs reduced when one of the Utility consumption (electricity) by 10% Period Q1 Q2 Q3 Q4 KW Cost in mio VND Cost in EUR Eur/ton 556,103 624 24,622 3.8 769,222 863 34,058 4.0 933,760 1,048 41,343 5.5 483,807 543 21,421 3.1 Total 2,742,893 3,078 121,445 4.1 Source: developed for the study Nowadays, people are scaring due to the price of the electricity increased continuously If they can reduce the power consumption, means that they can get much more than what mentioned above By doing the same way, they can gain much if they can reduce the other utility consumptions For instance, water, fuel oil for burner, diesel oil for boiler…are also considering to minimise consumptions 4.6 Findings from the case study Final project MBAVB   55    4.6.1 Production cost reduction practices Cost reduction in production is one of the most important schedules in Unilever Vietnam Apart from main production activity to have maximum outputs (shampoo), the factory people have to so many things to improve the production costs In Unilever Vietnam, it becomes daily practices and the employees have to keep in their mind Every year, the factory has to generate a list of the activities to reduce the production costs They call ‘cost saving list’ Table 4.7 – Extraction of the saving project list – Supply chain - target in 2012 Savings Project - Project Name UVN-North - Import Tinopals Directly UVN-North - Reduce Transportation cost NN-BNDC UVN-North - Using Solar Energy - LN and HS UVN-North - Reduce transportation cost LN and HS UVN-North - Reduce DO consumption for boiler UVN-North - Power saving by Inverter-control to Kemac dust filters UVN-North - NN to run during meal break for energy savings UVN-North over weight reduction UVN-North - Reduce transportation cost LN and HS UVN-North - Reduce Processing fee of DW at Lix North UVN-South – Overweight reduction for big size UVN-South - Overweight reduction for small size UVN-South - Selling Steam to Cico from HV UVN-South - Using KAP machine at CICO UVN-South - Replace DO by Biomass for Boiler UVN-South - reduce MH of Vim TC 500ml Final project MBAVB   56    UVN-South - Reduce percentage of Javel loss at HV plant UVN-South Transportation cost reduction for PA Source: UVN Looking at the list, some items are belonging to supply chain For instance, transportation costs will be in delivery while reducing diesel oil (DO) for boiler is in Make (production) The utility consumption reduction - mentions in previous section In the production area, they also find the ways to reduce overweight This item brings saving a lot for the company Every year, UVN manufacturing has to deliver a certain amount from the cost saving projects In 2011, they achieved around 1.2 million USD For instance, they could save more than 0.3 million USD from using the bio mass boiler To support this, management team has deployed many workshops and programs Focused improvement (or Kaizen3) is one of those to generate the new ideas and implement the approved ideas 4.6.2 Summary Above sections has illustrated the production costs figure in Unilever and its comparison against the benchmark, etc The benchmarking shows that the production costs for the hair care products in Unilever Vietnam are not com-                                                              (3) Kaizen - Japanese terminology for "improvement", or "change for the better" refers to philosophy or practices that focus upon continuous improvement of processes in manufacturing, engineering, game development, and business management People apply in healthcare, psychotherapy, life coaching, government, banking, and other industries around the world (Source: http://en.wikipedia.org/wiki/Kaizen) Final project MBAVB   57    petitive internally If there is not any exception, Shampoo in Unilever Vietnam cannot be preferable to sourcing plans of the supply chain In order to be the best choice, Unilever Vietnam is in struggling to improve the production costs for Shampoo Many events, programs in the factory are encouraging employee to involve in these activities Cost reduction result shows both physical achievement and their mindset In the last chapter coming, the study will propose some ideas to the UVN Final project MBAVB   58    CHAPTER V - CONCLUSION AND RECOMMENDATION 5.1 Conclusion Production cost is not so important with these companies, but it is very meaningful with the other companies In Unilever, production cost is one of the most important targets of the manufacturing It is not bottom up, but it is top-down target from the top management Due to limitation mentioned from beginning, it can only study one of the chains – Make (or production) in the whole supply chain In this study, it analyses the cost elements in the cost structure It also compares the shampoo production cost in Unilever Vietnam to the best performance factory (called benchmark) By comparing with the benchmark, the study points out opportunities to improve the costs They are:  Reduce the direct and indirect labors  Optimise the investment to get more output and improve labour productivity and  Minimise utility consumption… This study can be also helpful for the other company where people are struggling with the production costs 5.2 Recommendation 5.2.1 Improvement area As mentioned in previous sections, shampoo production in UVN is not advantage in competition in term of costs In the top group, Thailand and China are much better Comparing cost elements, UVN needs to more to improve the production costs of the shampoo These are: Final project MBAVB   59     Labor costs: both direct and indirect labours They have to improve productivity4  Depreciation: it is less than the other countries’ However, this is one of the way to reduce the labour costs that UVN has to balance  Utility consumption: has a big room to improve  Indirect consumables: it is a big proportion in the production cost Reducing this item will improve the total production costs 5.2.2 Recommendation for implementation People in manufacturing have many activities in their schedule They feel that the company always puts and pushes them under a high pressure In order to clear away these obstacles, management team in Unilever has to the following things:  Drive people to think right and right at the first time In Unilever production function, quality of products is the first rule; sustainability of the environment and at the end, cost Create a ‘cost’ or ‘cost saving’ mindset  Organise events to get fully involved from the employees of the whole levels Kaizen contest as mentioned in the previous section is one of the good examples  Provide more coaching to the employees Make people understand that production cost reduction is a practice, not theory 5.2.3 Production cost reduction opportunities Apart from the obvious opportunities resulted from the analysis; hereunder, it will show some ideas for production costs reduction Lean production                                                              (4) Productivity is a measure of the efficiency of production Productivity is a ratio of production output to what is required to produce it (inputs) The measure of productivity is defined as a total output per one unit of a total input (Source: http://en.wikipedia.org/wiki/Productivity)   Final project MBAVB   60    In the short explanation, ‘lean production’ accelerates production while eliminating many types of waste such as setup, excess inventory, unnecessary handling, waiting, low equipment utilization, defects, and rework It is lean because it provides a way to more and more with less and less – less human effort, less equipment, less time, and less space – while coming closer and closer to providing customers with exactly what they want In the company – Unilever Vietnam – they should review their organization as it has three management levels in the factory: plant manager, assistant manager and shift leader It should have maximum two levels This approach helps company to reduce the indirect labors Multi-skill development for the factory operators is also for direct labor reduction In China, they did it long time ago, so their direct labor is low At the some location in the shop floor, one operator can run several machines at the same time Looking at the benchmark factory in China, their waste materials and stock level are very low Unilever Vietnam – Shampoo production has many opportunities to improve it They should work closely with Research and Development (R&D) department to solve all defects related to the packaging materials They can talk to Planning function to minimize the stock level Also, compare equipment efficiency among the cluster, Shampoo production in Unilever Vietnam is in the low group In order to improve it, the company should invest their human resources by creating a better working environment The company is affording to satisfy the customer and consumers; they should also the same for the internal Provide more training; coaching to the operators will also help Final project MBAVB   61    REFERENCES - David Blanchard (2010), Supply chain management - best practices, 2nd edition, Wiley – John Wiley and Sons, Inc - David A Dilts (2004), Introduction to Microeconomics, 7th edition, Indiana – Purdue University-Fort Wayne - David Besanko, Ronald R Braeutigam (2011), Microeconomics, 4th edition, Wiley – John Wiley and Sons, Inc - Irvin B Tucker (2011), Microeconomics for Today, 7th edition, Cengage Learning - John H Blackstone, APICS dictionary, 12th edition, APICS The Association for Operations Management - J.R Tony Arnold, Stephen N Chapman, Lloyd M Clive (2008), Introduction to Materials Management, Pearson Prentice Hall - K.C Arora (2004), Production and operations management, Laxmi Publications - N.Gregory Mankiw (2010), Principles of MicroEconomics, 6th edition, Cengage Learning - Paul Krugman, Robin Wells (2009), Microeconomics, 2nd edition, Worth Publishers - Procter and Gamble (2003), Standard Initiative Model Product Launch - William J Stevenson (1995), Production / Operation management, 5th edition, Irwin Professional Publishing - Robert E.Hall and Marc Lieberman (2010), Microeconomics – Principle and application, Irwin Professional Publishing - Robert H Frank (2008), Microeconomics and Behavior, 7th edition, McGrawHill – Irwin - Robert M Solow (1987), Grow Theory and After, Nobel Lecture, Stockholm, Sweden - Rober H Frank, Ben S Bernanke (2009), Principles of Mircoeconomics, 4th edition, McGraw Hill Final project MBAVB   62    - Taylor, Weerapana (2009), Principles of Microeconomics, 6th edition, Houghton Miffilin Company - http://en.wikipedia.org/wiki/Kaizen - http://en.wikipedia.org/wiki/productivity Final project MBAVB   63    APPENDIXES Appendix 1: Benchmark data in Unilever Asia BENCHMARKING - HAIR -OEE Bangla Chitta VN Cu chi Indo Cikarang China Hefei Thai'd Bangkok Pakistan Rahim India Amli Japan Japan Kata Saga India Doom S Korea India Phi Daejon Kandl a Manila India Sri Lanka Hari Colombo OEE 90.56 76.5 81.45 81.44 81.27 78.87 77.6 77.55 73.87 72.45 71.53 70.6 68.78 68.2 39.1 OR 80.35 90.8 88.65 87.57 91.1 84.52 91.28 96.6 94.12 95.93 93.41 92.9 79.92 88.97 43.65 PM waste 0.25 0.74 0.03 -0.33 0.35 0.83 1.07 0.07 0.22 0.85 0.4 2.56 0.49 0.69 RM waste 1.15 0.52 0.43 -0.1 0.36 0.48 0.2 0.44 0.5 -0.18 1.08 0.94 1.48 0.3 2.07 Prod cost (euro/ton) 139.2 92.2 109.8 57.4 90.7 275.9 164.1 234.0 242.3 174.1 205.6 102.5 188.5 218.0 631.7 Final project MBAVB   64    Appendix 2: OEE chart OEE (%)  YTD'11 100 90.56 90 81.45 80 81.44 81.27 76.5 78.87 77.6 77.55 73.87 72.45 71.53 70.6 70 68.78 68.2 60 50 39.1 40 30 20 10 Chitta Cu chi Cikarang Hefei Bangkok Rahim Amli Kata Saga Doom Daejon Kandla Manila Hari Colombo Bangla VN Indo China Thai'd Pakistan India Japan Japan India S.Korea India Phi India Sri Lanka Final project MBAVB   65    Appendix 3: Shampoo making process diagram - Unilever Final project MBAVB   66    Appendix – Energy saving application photos   Natural lighting - Skylight Natural lighting – plastic louvers High pressure halide 16mm tube light Final project MBAVB   Tube light used in Warehouse we used to install High-pressure halide